Tuesday, December 18, 2007

William Zeckendorf

Forbes, Oct 24, 1983 v132 p121(2)

Living with a legend. (William Zeckendorf Jr.) Rudnitsky, Howard.

Full Text: COPYRIGHT Forbes Inc. 1983

Living with a legend

WILLIAM ZECKENDORF Jr. is not likely to loom as large in the real estate game as his controversial father. Few could. A great salesman, a master at getting media attention, William Zeckendorf Sr. conceived and developed grandscale projects like Century City, Kips Bay, Roosevelt Field, Mile High Center, Place Ville-Marie, to name only a few. But he went broke, too, taking a lot of investors with him when his public company, Webb & Knapp, Inc., also went under in 1965, and he declared personal bankruptcy four years later. He endured a few years as a small-time developer and died in 1976. In the end his reach exceeded his grasp.

Today his son, William Zeckendorf Jr., carries the name and plays the game far more quietly, developing projects mostly in his native New York City. Back then, he lived through all of it, working up to president in his father's shadow, watching the glorious ride up, sitting helpless through the awful ride down, when Marine Midland Bank's calling in an $8.5 million note brought the company into involuntary bankruptcy. How has the experience affected the son?

He meets a visitor in his modest, almost spartan office in the building where he lives--an office utterly unlike his father's grandiose headquarters --and he speaks softly, so softly it is sometimes difficult to follow what he is saying.

"Today we have a very small, tight organization,' he says. "It's basically myself, my two sons and ten other people.

"In my father's heyday, with many major projects across the country and in Canada, we had lots of vice presidents and a large staff.' He falls silent a moment. "Because of that large chain of command,' he remembers, "things started getting away from us. We got out of touch.'

Control is important to Zeckendorf Jr., who knows firsthand it's better to be small and successful than famous and broke. On going public like his father did: "Who wants to have the pressures of generating earnings for Wall Street and all the attendant publicity? I prefer the anonymity to the notoriety. I started out way up at the top with publicity. It's a double-edged sword.' Bill Jr. doesn't criticize his father's flamboyance, but clearly he will have none of it.

Beyond the excessive publicity and the excessive leverage, there was clearly substance to the elder Zeckendorf. When it came to picking up the pieces, Zeckendorf Jr. points out, it was the investing institutions that put his father back in business again, albeit on a much smaller scale. "Equitable Life Assurance Society and the Manhattan Savings Bank financed my father's first project after the bankruptcy. They realized that over the years my father had done enough for them, and they were willing to help.'

Investors today remember little and care less about what happened 20 years ago, he finds. "What counts,' he says, "is a good track record since 1975, which is what we've had.'

He pulls out a few examples, and then for the first time the old Zeckendorf flair for salesmanship begins to show through.

Not many developers could have put a 33-story condoscum-commercial-space building on the controversial site at 96th Street and Broadway on Manhattan's Upper West Side, which had been sitting empty since the early Seventies. In fact, several developers before him had tried it. A proposed department store and low-income housing had been killed by community opposition and the lack of financing.

Then Zeckendorf endowed the community with a gardenlike park on the big garage roof, and has plans for a restaurant in the building. Not exactly as dramatic or beneficial as offering the site for the U.N. building, as Zeckendorf Sr. did in 1946, which certainly couldn't have hurt his subsequent city projects. But it worked. The same shrewd appraisal of what the other side will jump at showed through where others had failed, particularly since he was now working with higher-income buyers.

Then come the numbers. Zeckendorf Jr. quickly sold most of the apart ments at an average price of $200,000, or $200 a square foot, modest by New York standards. "Since you don't have a permanent takeout loan available for condominiums, you have to be sure you sell your units out pretty quickly. Otherwise you could be eaten up by a surge in short-term rates. We're paying 1 1/2 points over prime.'

Building without takeout on floating loans during 1981 and 1982, when rates were going through the roof and the housing market was drying up? The son is not wholly averse to risk. Zeckendorf sacrificed some profit on the apartments, but now he has signed up commercial tenants to long-term leases at high rents: roughly $50 a square foot per year on 40,000 feet of commercial space, vs. a comparable $27 per square foot for residential tenants. That's where the real profits will come from. Nothing grandiose, just profitable.

The next deal: In July Zeckendorf paid over $1 million to Rapid-American Corp. (whose eccentric CEO Meshulam Riklis' son-in-law is a Zeckendorf partner) to acquire an option on the abandoned S. Klein department store property, located in New York's seedy Union Square. Rezoned, it could become a $150 million, 700-to 900-unit apartment complex plus commercial space. There flickers the spirit of the father again: He would aim to transform the 14th Street neighborhood, where low-income buyers shop and drug users cop in broad daylight, by overwhelming it with his upscale creation. This is what Zeckendorf Sr. once attempted for larger sites.

So far that's only a real estate option and chancy plans. But Zeckendorf pulls out another unusual project that's already under way: the Delmonico Plaza, a $75 million, 24-story office building for 59th Street in midtown Manhattan that Zeckendorf plans to market as a condominium, the first office condo in a prime New York office location.

Practicality reigns there, too. "What we're looking for mainly are foreign banks and corporations who may be interested in buying,' he says. What if the buyer needs more space in a couple of years?

"Simple, he buys an extra floor now and he does a leaseback with us. We rent it out until he's ready to use another floor.' In their own countries, according to Zeckendorf, most foreign companies deliberatley buy more office space than they rent. "If we can't line up more than one-third of our tenants in the next four to five months as purchasers, we'll revert to a rental.' The project is a bit risky.

Still, he has managed to line up a $60 million, five-year construction loan from Manufacturers Hanover, in addition to $10 million in equity and loans from the Beverly Hills Savings & Loan.

Then there are the hotels, mostly in New York, that have turned a nice profit for Zeckendorf and his investors through renovation and/or conversion into apartments--the 1,733-room New York Penta (formerly the New York Statler), the May-fair Regent, the McAlpin House and the Delmonico.

But large hotel deals are not always lead-pipe cinches. "Sometimes they can turn out to be bottomless pits,' Zeckendorf notes. "No matter how much you pour into them, it seems they need more money to fix up.' Zeckendorf and his investors have already spent $10 million, and will spend more, to upgrade the Shoreham Hotel in Washington, D.C. with no profit currently in sight. They will need plenty more to build the 200 or so condo units next door. Zeckendorf is selling off part of his Shoreham investment to reduce his own risk and to bring in more money to help complete the project.

Zeckendorf Jr. allows the talk to drift back to his father. The banks let other REITS work out their problems, he says. If they hadn't pulled the rug out from under Webb & Knapp, Zeckendorf speculates, his father "would have built the greatest real estate portfolio in the world.'

Zeckendorf Jr. is 54 now, as old as his father was in the heyday of his construction period. He has clearly learned a lot from his father--not the least from his father's fall.

William Zeckendorf Jr. is searching for a financial angel to help him maintain control of Worldwide Plaza, one of the most important developments built in the boom years of the 1980s.

His partnership - which includes Japanese construction firm Kumagai Gumi, World Wide Holdings Corp. and New York developer Arthur G. Cohen - has so far been unable to find a deep-pocketed investor to help it buy its $600 million loan from Deutsche Bank.

If the group can't come up with the funds, Deutsche Bank is likely to try to sell the debt before the end of the year. Already, the German bank has hired an adviser and very quietly approached a number of potential buyers.

"(The partnership) would like to buy the mortgage," says Mr. Zeckendorf. "The way it would probably happen would be in partnership with someone else. But Deutsche Bank has the complete right to sell (the mortgage) itself."

Worldwide Plaza is only one of many buildings overleveraged during the 1980s real estate bubble and currently under intense financial pressure. But it is important because of the fanfare with which the mixed-use development went up, because the 1.6 million-square-foot project is now Mr. Zeckendorf's flagship property, and because his company receives substantial management fees.

About six months ago, the Zeckendorf group did line up an investor to repurchase the debt from the bank. But Deutsche Bank, which will have to take a big write-down to unload the debt, balked. At the last minute, the German bank raised the amount it wanted for the mortgage, and the deal fell apart.

Deutsche Bank declines to comment other than to confirm that it holds the mortgage. But informed sources say the bank has now hired Hines Interests LP to begin marketing the debt as early as this fall.

"I don't believe that Deutsche Bank will get more from this process than what it originally said it would take," says Andy Singer, chairman of the Singer & Bassuk Organization, which is acting as the Zeckendorf group's investment banker in its attempts to repurchase the mortgage.

Real estate sources estimate the mortgage may be worth as little as half its current face value. "Deutsche Bank," says one such source, "has a real problem on its hands."

In the late Eighties, when Mr. Zeckendorf and his partners were developing the property, the real estate market was booming. Cash was easy to come by, and if the project ran over budget, so be it. The group had a vision of creating a so-called midtown west in the once-desolate area of Eighth Avenue.

Worldwide Plaza itself, at 825 Eighth Ave. - the site of the old Madison Square Garden - was to be the anchor. And, to many people's surprise, it did attract name tenants: the law firm Cravath Swaine & Moore; ad agencies Ogilvy & Mather (and later, other divisions of parent WPP Group) and N W Ayer; and Polygram Records.

Changing outlook

But when the market collapsed, development in that area stopped, and the rosy assumptions about ever-increasing rents no longer held.

The debt has already been restructured once and is not in default, but the terms allow for payments far lower than a debt of that magnitude would typically command.

Although the building effectively is filled today, and the tenants are all large and have long-term leases, Worldwide Plaza's asking rents have fallen with the market. The average asking rent for the building's office space is now in the high $20s per square foot versus the mid-$40s four years ago, according to the real-estate tracking firm RE/Locate.

When the building's long-term leases roll over, they will be renegotiated downward. Polygram, in fact, is now concluding a renegotiation of its lease that will include an expansion from 260,000 square feet to more than 300,000 at a reduced rent. Real estate sources say that an expansion by this financially strong tenant could help the building's credit worthiness and make the mortgage easier to market.

Opportunity funds shun deal

But the biggest buyers of real estate loans, the opportunity funds, are said to have seen the deal and passed."The problem is, when you invest a large sum of money, you have to know that there's going to be an exit," explains Jimmy Kuhn, a broker at Newmark & Co.

No one expects an openly hostile conclusion, such as a foreclosure or an outright sale of the building, both of which would force the owners to take a tax hit and would create a public relations nightmare.

But the development group is likely to be squeezed if it can't buy back the mortgage. in one possible scenario, a new owner of the mortgage could insist on an equity position in return for debt forgiveness. The effect could even be to lower the developer group's stake in the building to the minimum level that would allow it to avoid any tax hit.

It is also impossible to tell whether the partnership that developed the building will continue to hold as the financing is restructured. None of the other partners would discuss the building. Mr. Zeckendorf maintains that the members of the group have equal votes - though not necessarily equal equity stakes - and act as one.